HSAs are a powerful, but overlooked, retirement asset


There are a lot of ways to grow wealth in a tax-efficient manner, but a Health Savings Account (HSA) is still the best – and most overlooked – deal in the tax code.

That deal comes in the form of a compelling mix of tax breaks and other savings that can keep health-insurance costs down. But under the right circumstances, these accounts offer an even more powerful – and largely underappreciated – chance to boost your long-term savings and provide a nest egg to offset the rising cost of health care later in life.

Established as part of a federal tax law that took effect in 2004, HSAs are available to people who are in a high-deductible health plan. The savings begin with a triple tax advantage:

  • Contributions to an HSA net the contributor a current-year tax deduction of up to $3,600 for an individual and $7,200 for a family.
  • Any earnings or growth in the value of the money in the account is tax-free.
  • Funds withdrawn from the account are tax-free if they are withdrawn according to HSA rules and used for qualified health-care/medical expenses.

While these tax advantages can certainly be useful to the many people who contribute to an HSA and use the account to pay health-care and medical expenses on an ongoing basis, it’s the longer-term possibilities that make it a particularly appealing tool for people saving for retirement.

Funds in an HSA can be used to cover qualified health-care and medical expenses at any stage in a person’s life, including retirement, when they can be used to pay Medicare premiums, long-term-care insurance premiums, long-term-care expenses, and day-to-day costs, from copays to prescription drugs to high-priced surgeries.

Those costs can add up over time, particularly during retirement, when people are more likely to need health care. According to Fidelity Investments, the average retired couple, age 65 in 2021, may need about $300,000 in savings (after taxes) to cover health and medical expenses. That figure is in today’s dollars and excludes potentially expensive long-term care.

So rather than using an HSA mainly as a revolving account to cover qualified expenses in the short-term, there’s value to using it as a long-term savings vehicle. Many HSA providers even offer IRA-like mutual-fund investment options, in addition to a base savings account.

Such a strategy works in large part because of the triple tax advantages associated with an HSA: Contributions, any growth inside the account, and distributions (withdrawals) from the account are all tax-free when used for qualified medical/health-care expenses.

By investing your HSA savings as you would your retirement savings – typically in a diversified mix of mutual funds that offer the opportunity for long-term growth –  you’ll build a tax-free fund dedicated to health costs in retirement, which are likely to represent a significant portion of your future budget. The chance to add another pool of tax-deferred money to your retirement savings is an advantage you shouldn’t ignore.

Leading up to and during retirement, the funds in an HSA can always be used, tax- and penalty-free, for medical/health expenses. When the account holder hits age 65, HSA funds can be used for any purpose without penalty (although the account owner will have to pay income tax on distributions that aren’t for medical/health expenses). Also, at age 65, account owners can use HSA funds tax-free to pay premiums on Medicare and certain kinds of insurance, such as for long-term care.

Regardless of your stage in life, it’s worth considering contributing to an HSA, and, if cash flow permits, leaving at least some of the funds in the account as a long-term investment for retirement – because every dollar you put in an HSA and save for retirement health-care expenses will take some stress off your other retirement accounts.

JASON E. SIPERSTEIN, CFA, CFP, RMA, is the chairman of the Financial Planning Association of Rhode Island, program director for the CFA Society Providence and president of Eliot Rose Wealth Management. He can be reached by email at jes@eliotrose.com. This is his final column for Jewish Rhode Island.